3 Reasons to Love MicroFlix

It sounds counter-intuitive, perhaps even callous. But Microsoft (Nasdaq: MSFT  ) should part with some of its billions to acquire Netflix (Nasdaq: NFLX  ) as soon as possible.

The timing stinks. Mr. Softy is in the midst of a restructuring that will cost as many as 5,000 workers their jobs. Surely CEO Steve Ballmer would be hard-pressed to justify a multi-billion-dollar deal while cutting staff, right? Don't be too sure. Quoting from a January memo to employees in which he announced the layoffs:

... we are not immune to the effects of the economy. Consumers and businesses have reined in spending, which is affecting PC shipments and IT expenditures. Our response to this environment must combine a commitment to long-term investments in innovation with prompt action to reduce our costs. [Emphasis added.]

That last sentence is a classic hedge; language meant to assuage both employees and investors that Microsoft is still looking ahead. But what if this memo is more than carefully crafted PR? What if Ballmer means what he says? Buying Netflix would accomplish his stated goal of investing in innovation and put added pressure on Apple (Nasdaq: AAPL  ) , GameStop (NYSE: GME  ) , and Google (Nasdaq: GOOG  ) , among others. Here's how.

Welcome to MicroFlix, how can we help you?
First, let's talk retail. As much as I loathe the idea of a Windows store, a Microsoft entertainment center could be very effective at selling the Xbox, Microsoft games, Zunes, and related products for your living room. Imagine how much better it would be were Netflix to be carefully integrated into the experience.

At minimum, the stores could feature a sampling of top-of-the-line touchscreen PCs for accessing your Microsoft services, including your Netflix queue. And if you don't yet have Netflix? No problem, we'll be happy to get you started with a free trial -- just follow the on-screen instructions, and don't forget to pick up your coupon for 10% off a Microsoft game at the printer in the back. Netflix, in other words, could be a traffic driver.

For the gamer who just can't wait
Stores would also be convenient. Say you're a subscriber with a movie to return, but you're jonesing for the latest version of Grand Theft Auto. Drop by MicroFlix and get your fix. It's only a matter of time before Netflix begins renting games anyway; why not make them available in-store a la Blockbuster (NYSE: BBI  ) ?

The answer is that games tend to make for lousy inventory; they're designed for obsolescence. And yet Microsoft's entertainment centers would have no choice but to carry the latest and most popular Xbox games to be relevant. Trade-ins and those that don't sell could become rental inventory.

Chances are, with so much competition in this area, rental gaming wouldn't be very profitable for MicroFlix. But that's not the point -- convenience is. Convenience drives traffic, and we know from Apple's numbers that traffic matters immensely.

For the don't-bother-me-I'm-in-a-light-saber-duel couch potato
Then again, retail is only one element of the MicroFlix story. An important part, to be sure, but what makes this tale so interesting is how the two businesses could grow together. Microsoft wants to supply the infrastructure for Web content, Netflix wants to deliver it.

Consumers appear to like that pitch. Already, more than one million Xbox Live GOLD members have downloaded the Netflix player for streaming movies via their consoles. They've watched 1.5 billion minutes of movies thus far.

Microsoft and Netflix needn't combine to keep offering this service. But gaming-on-demand could require closer cooperation, and that would be achieved most easily as one company. You could argue that Take-Two Interactive (Nasdaq: TTWO  ) and its peers would balk at streaming games through a rival's service, but I doubt it; publishers depend on console platforms for revenue, and the Xbox has proven itself to be a key platform. Xbox Live with Netflix wouldn't be all that different.

You want innovation, Steve? Talk to the guy who sits to your right at each Microsoft board meeting, Netflix CEO Reed Hastings. Make him an offer. All you've got to lose is the battle for the living room.

Apple, GameStop, and Netflix are Stock Advisor selections. Microsoft is an Inside Value pick. Google and Take-Two Interactive are Rule Breakers recommendations. Try any of these Foolish services free for 30 days. There's no obligation to subscribe.

Tim had stock and options position in Apple and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns is also on Twitter as @TheMotleyFool. Its disclosure policy kills at Asteroids. Missile Command? Not so much.


Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 23, 2009, at 11:24 AM, madmilker wrote:

    this is a joke!

    rite.

  • Report this Comment On February 23, 2009, at 12:07 PM, DavisFreeberg wrote:

    Microsoft is a place where innovative companies go to die. Netflix has too much talent to ever agree to a buyout from them. There would be more synergies with an Apple hookup, but their build instead of buy philosophy would make it just as unlikely. At the end of the day, I don't really see Netflix needing to sell to anyone. They're doing a great job as it is.

  • Report this Comment On February 23, 2009, at 12:12 PM, TMFMileHigh wrote:

    Hello DavidFreeberg,

    >>At the end of the day, I don't really see Netflix needing to sell to anyone.

    Agree completely. Microsoft needs Netflix, not the other way around. Ballmer should make a bid if he really plans on opening retail stores.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On February 23, 2009, at 1:56 PM, jkellynewyork wrote:

    you do realize that the only NFLX has going for it is its mail order DVD business that it acknowledges will die in the near future - you also must realize that NFLX streaming is only good because of Starz Play - which NFLX gives to its subs for free (at a cost to NFLX)

    and MSFT would pay billions for this? never going to happen - sorry

  • Report this Comment On February 23, 2009, at 7:11 PM, clothier wrote:

    Microsoft should have bought Sirius Satellite Radio and put it on their Zunes. Would have made me consider something other than an iPod.

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